IEEJ (August 2005)

Summary of the 392nd Regular Research Session

June 21, 2005

The Changing World LNG Market and its Impact on Japan
Diversified Market Structure and the Challenges Faced by Japan
Takeo Suzuki, Senior Coordinator (Natural Gas), Oil & Gas Group, Industrial Research Unit

<Research Objectives>
The world demand for LNG is on the rise because of its use for power generation with CCGT
(Combined Cycle Gas Turbine) application, relatively high environmental benefits, and declining
supply costs. In particular, the demand is expected to surge in the Atlantic market as exports to theU.S., where natural gas prices have stayed higher level, are increasing rapidly. With this as abackdrop, the world LNG market is showing signs of dramatic changes.
LNG, which was a very special commodity when it was first introduced to the market, has becomea major source of energy, with a total of 13 countries exporting and another 13 countries importing it
as of 2005. More recently, Russia, Norway, Equatorial Guinea, and Yemen have started exporting
this energy product, while the U.K. has resumed its imports. In addition, China, Canada and Mexico
are likely to join the ranks of importing nations.
This report provides an overview and analysis of (1) world LNG market conditions, (2) changes in
LNG contract conditions, and (3) the current LNG pricing systems, thereby shedding light on thepossible impacts of these factors on Japanese businesses and as well as on the challenges to beaddressed in the future.1<Key Conclusions>1.

In the short to medium term, supply and demand is seemed to balance out in theAsia-Pacific market, while the Atlantic market is increasingly tight due to a surge inimports into the U.S. – which is strengthening the presence of Qatar as a major supply
source. As a result, the dependence of the world LNG market on the Middle East supply
will increase further. The diversification of supply sources is thus imperative to stabilize
the market.

2.

A shortage of supply due to malfunctions of LNG output from Indonesia raises keen
concerns about the Asian market; it serves as a lesson about the long-observed risks
associated with trying to ensure stable supply through take-or-pay long-term contracts, themost common form of purchasing LNG. In the wake of deregulation of the world powerand gas market, there has been a growing demand to reduce market prices and increase theflexibility in supply contracts, while the importance of ensuring “stable supply” reliability
is gaining renewed prominence among buyers. Stable supply can be ensured in partthrough coordination and cooperation between suppliers and users. As the example of theEuropean market shows, LNG importers in Asia may cooperate with one another in easing
regulations on export destinations to be better prepared to deal with short supply situations.

3.

The Asia-Pacific, European Continental, and the U.S/U.K markets will follow their own
pricing systems, which may approximate one other but are unlikely to be standardized
globally. As for the current Asia-Pacific pricing system, which is linked with the Japanese
Crude Cocktail (JCC) and incorporates the “S curve” factor, minor revisions can beexpected, such as changes in the reference oil price and the sensitivity to oil prices (the1This report is in line with the “Survey of the Development and Promotion of Natural Gas” commissioned by thePetroleum and Natural Gas Division of the Ministry of Economy, Trade and Industry (2004): “The Asia-Pacific andAtlantic LNG Markets” and “Changes in LNG Contract Conditions.”

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IEEJ (August 2005)

degree of impact of oil price fluctuations, etc.). With oil prices hovering near record levels,
the Western market is likely to take into account links to competitive fuel sources andadjustments associated with price fluctuations (S curve). The current Asia-Pacific pricing
system, for that matter, deserves a certain amount of credit.
4.

Japan’s LNG industry, which created the world LNG market and has been playing aleading role in its development over the past three decades, is devising a range of strategies.
Its approaches to the LNG value chain, for example, have expanded to include not only
downstream operations but also middle and upstream operations (e.g., natural gas
production, liquefaction and transportation), while becoming increasingly complex. At thesame time, it appears poised to extend its commercial reach into Asian countries including
China and India. Under these circumstances, more players entering the growing LNG
market, increasingly diversified and complex transactions, and progress in deregulation areexpected to offer new business opportunities to Japanese companies engaged in the LNG
business.

<Background>(1)

Changes in the World LNG Market and Security of Supply
The demand in the Atlantic market is increasing due to a surge in imports into theU.S. – which is strengthening the presence of Qatar in the world LNG market in terms ofa bigger supplier. New contracts for LNG exports to the U.S. represent almost 60
million tons a year, of which only 8 million tons will be supposed to come from theAsia-Pacific region. Their impact on the Asia-Pacific LNG market, which is estimated at
84 million tons a year, will thus be rather limited for the time being (see Fig.1, Table 1and Fig. 2)2.
In terms of the LNG supply routes from the Middle East (including Qatar) to each
destination in the Atlantic market, it seems probable that the Suez Canal, the Strait ofGibraltar and the Cape of Good Hope will be bottlenecks in securing sea-lanes. As in thecase of oil, therefore, the security of LNG supply needs to be examined from a newperspective.
In diversifying its supply sources (countries) over the long term, for example, Japan
should reinforce its relationships with emerging LNG exporters including Russia and Iranas well as with other prospective exporters.

(2)

Increasing Importance of Regional Cooperation Among LNG Importers in Asia
A surplus in LNG supply, if any, goes to the U.S. market (where spot prices remainhigh all year round) as long as there is a means of transportation, under current situation.
Because of this, coupled with the supply shortage from Indonesia, the Asian LNG market
is increasingly tight (see Fig. 3).
The present situation in the Asian natural gas market is that LNG supply throughinternational PL is extremely limited and that production is hard to keep up with thegrowth in demand in the region; the market is therefore dependent on imports from otherregions of the world as a form of LNG. Take-or-pay long-term contracts are thus essential
in ensuring security of supply3. The lesson this time, however, is the importance ofregional cooperation among importers when the actual delivery is not met with thecontractual determined amount.
As this issue can be addressed through coordination and cooperation between suppliers
and users, demolishing og the destination clause should be discussed with a priority. If
this limitations work as a disincentive to prospective buyers, they will then act as a factor

2This is not the case when emergency procurement takes place (like the recent case in Japan) or when the U.S.
Henry Hub price takes a plunge.
3
While the shortage is reportedly due to a failure in gas production, aging LNG facilities are also a concern – andshould be seen as a warning about security of supply.

2IEEJ (August 2005)

hampering the growth of the market (i.e., a disadvantage for sellers); they need to be
examined from the broader perspective of promoting the LNG market as they may also
work as a disincentive to both existing buyers, who plan to expand LNG purchasing, andnew small-scale buyers, who are poised to make inroads into the market.
(3)

Future of the LNG Pricing System in the Asian Market
The Asia-Pacific, European Continental, and the U.S/U.K markets will follow theirown pricing systems, which may tend to approximate one another but are unlikely to be
standardized globally. As for the current Asia-Pacific pricing system, which is linked with
the Japanese Crude Cocktail (JCC), minor revisions can be expected, such as changes in
the reference oil price and the sensitivity to oil prices (the degree of impact of oil pricefluctuations, etc.).
On the other hand, there is a need to address the strong demand for lower prices. It istherefore recommended that a procurement consortium be established by not only powerand gas companies (LNG buyers) but also with the participation of domestic upstream
operators, as this would have the effect of maximizing lot sizes and enhancing purchasing
power.
With natural gas prices remaining at record levels in the U.S. market for quite sometime, buyers are beginning to call for stable prices, links to competitive fuel sources andadjustments to deal with price fluctuations (S curve). Thus the current Asia-Pacificpricing system deserves a certain amount of credit (see Fig. 4).
The majority of LNG trade will probably be based on long-term contracts in the Asianmarket, which, however, could be influenced significantly by the ups and downs in theU.S. market. This will also result in an increase in flexible transactions such as spot
trading.

(4)

Development of New LNG Business by Japanese Companies
An increase in the number of players of various backgrounds in the growing LNG
market, increasingly diversified and complex transactions, and progress in deregulation
are changing the LNG business of conventional players in Japan (traditional LNG buyers).
At the same time, Japan’s LNG industry, which created the world LNG market and has
been playing a leading role in its development, is beginning to address the issues in theLNG market in a variety of ways.
In going up into upstream operations (mining production and liquefaction of naturalgas), development projects need to be explored with upstream operators and LPG-relatedcompanies (depending on the composition of gas), with the option of forming joint
projects in mind.
Japan’s LNG industry should offer technical assistance to prospective LNG importers
in Asia (India, China, etc.), taking advantage of its expertise and experience in the LNG
business accumulated over the past three decades. Specifically, it should take part in orlaunch gas and power generation projects in these areas. One such option is to participate
in projects to construct for LNG import terminals in Asia, or to act as a foreign buyer todevelop demand in the country it is operating in.
As far as LNG is concerned, the Japanese market still accounts for about 50% of theworld market in a situation where demand is on the rise in the Atlantic area. Japanesebuyers, therefore, continue to hold the key to ensuring security of LNG supply in theglobal marketplace. Accordingly, they should extend their reach into the growing
overseas market to capture business opportunities.

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IEEJ (August 2005)<References>Fig. 1

U.S. LNG Demand Forecast(10,000 tons)
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
2019

2017

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

0

Contract Quantity (Europe and the U.S.)
Contract Quantity
LNG Imports
Demand Forecast (High Demand Scenario)
Demand Forecast (Low Demand Scenario)(Source) Websites of Cedigaz, Gas Strategies, and other companies
Table 1

New LNG Supply Contract with the U.S. (Source) Websites of each companies, etc.

Exporter

Project Name Project Owners
Nigeria LNG(Train 4-5)

NNPC, Shell,
Total, ENI

Nigeria LNG(Train 6)

NNPC, Shell,
Total、ENI

Destination
The U.S.
The U.S.

Nigeria

Egypt
Equatorial Guinea
NorwayRussiaQatar

Europe, The U.S.
Spain, The U.S.,
MexicoEgyptian LNG
EGAS, EGPC,The U.S., Italy(Train 2)
BG, Petronas etc.
Marathon,Alba LNG
The U.S.
GEPetrolPetro, Statoil,
Snohvit
The U.S.
Total, GdF etc.
Shell, Mitsui &Sakhalin IICo., Mitsubishi
Mexico, The U.S.
Corporation
RasGas
QP, ExxonMobil
The U.S.
(Train 6-7)
Qatargas II
QP, ExxonMobil,
Europe, The U.S.
(Train 2)
Total
QP,
Qatargas 3
The U.S.
ConocoPhillips
Qatargas 4

Oman

Qalhat LNG

Indonesia

TangguhAustralia

Gorgon

QP, Shell
The Omani
Government,
Oman LNG etc.
BP, MI Berau,
CNOOC etc.
ChevronTexaco,
Shell,
ExxonMobil

Contract Period Contract Quantity
Buyer(Year)(10,000 tons/year)
2005~2025
110
Shell(20 years)
2005~2025
220BG(20 years)
2007~2027
90
Total(20 years)
2007~2027
140
Shell(20 years)
2006~

360

BG

2007~2024(17 years)

340

BG

2007~

175

Statoil

2008~2028(20 years)

185

Shell

1,560

ExxonMobil

520

Total

2009~

750

ConocoPhillips

Europe, The U.S.

2010-2012~

780

Shell

The U.S.

2006~2021(15 years)

80

Mitsubishi
Corporation

Mexico, The U.S.

2008~2028(20 years)

370

SempraMexico, The U.S.

2010~

250

Shell

Total

4

2008~2033(25 years)
2009~2034(25 years)

5,930

IEEJ (August 2005)

Fig. 2

Incremental LNG Production in Qatar(10,000 tons)
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,00001997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Qatargas (Train 1-3)

Qatargas II (Train1-2)

Qatargas 3 (Train 1)

Qatargas 4 (Train 1)

RasGas (Train 1-2)

RasGas (Train 3)

RasGas (Train 4)

RasGas (Train 5)

RasGas (Train 6)

RasGas (Train 7)

Source: Websites of the parties concerned

Fig. 3

Supply Shortage from Indonesia(10,000 tons)
2,000

A shortageof 2 .3 5
million ton s

1,800
1,600
1,400
1,200
1,000800
600
40020001995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Contract Quantity

Quantity Delivered

5IEEJ (August 2005)

Fig. 4

LNG Prices$/MMBtu

7.00
6.00
5.00
4.00
3.00

Apr-04Jan-04

Oct-03

Jul-03

Apr-03Jan-03Oct-02

Jul-02Jan-02Oct-01

Jul-01

Source: IEA, Energy Price & Taxes

Apr-01

Jan-01

Jul-00

Jan-00

0.00

Apr-00

1.00

Oct-00Japan
The U.S.
EUJCC

Apr-022.00

Contact: report@tky.ieej.or.jp

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